February 3, 2014

Conservatives Need to Understand Income Inequality

Two pieces in today’s newspaper caught my eye because they discussed the growing income inequality throughout the United States. One article described the disappearance of the middle class through the growth of high-end and fast-food restaurants. Those in the middle such as Olive Garden and Red Lobster (that belong to the same company) are losing customers.

John Maxwell, head of global retail and consumer practice at PricewaterhouseCoopers, explained, “You don’t want to be caught in the middle.” And the situation is getting worse. In 2012, the top 5 percent of earners did 38 percent of domestic consumption, up from 28 percent in 1995. That’s a rise of 30 percent in less than 20 years. Between 2009 and 2012, 90 percent of the increase of consumption came from the top 20 percent of households.

Even conservatives are recognizing the inequality, as demonstrated by a column from far-right Robert Samuelson. His rationale for the gap, however, is not the gluttonous rich. “The poor are not poor because the rich are rich. The two conditions are generally unrelated.” According to Samuelson, people are wealthy because they run successful businesses or have professional careers. He argues against raising the minimum wage because the poor are “not in the labor force.”

Samuelson does confess that pretax incomes of the top 1 percent did increase 190 percent between 1980 and 2010. Since 2009, however, the top 1 percent grabbed 95 percent of the post-recession growth at a time when 90 percent of people in the United States grew poorer. Samuelson blames the bottom 95 percent for borrowing during the 1980s when “income growth slowed.” Because “debt led to a consumption boom that was unsustainable,” people suffered—but it was their fault. Samuelson claims that the rich aren’t to blame for the income gap.

A recent Oxfam report, “Working for the Few,” on global wealth inequality shows the seriousness of the income inequality. Around the world, 85 people own as much as half the world’s population. That’s 3.5 billion people. The richest 1 percent in the world has $110 trillion, 65 times the total wealth of those 3.5 billion people who collectively own about $1.7 trillion—about 0.7 percent of the world’s wealth.

The U.S., with 5 percent of the world’s population and 30 percent of the wealth, is largely responsible for the disparity because the net worth of 30 people in this country equals that of half the U.S. population—157,000,000 people. China, India, and Africa combined have about half the world’s population and just 12% of the wealth.

With its 1.1 percent of the nation’s wealth, that same bottom half of people in the U.S. own a smaller percentage of the country’s wealth than almost all other countries and continents. In Asia, the poorest half of the country owns 1.3 percent of the wealth, in Africa 2.1 percent, in Latin America 3.2 percent, in India 4.5 percent, in the United Kingdom 7.6 percent, and in China 9.6 percent.

People in the United States also have much less chance of moving up to a higher level of income than in any other place in the world. Seven of ten in poverty will stay there. The conservative politicians who lowered the food stamps for the poor while maintaining farm subsidies for the wealthy (including themselves) keep arguing that people are poor because they aren’t willing to work hard. If that were true, many of the poor would climb up the ladder. The Global Wealth Databook reports:

“North America is…less mobile than other regions, especially over longer time horizons. Europe is next in line, followed by the middle group of Asia-Pacific, Latin America and Africa. The most mobile regions are China and India.”

Almost everyone in the United States suffers from the income inequality not seen in this country for almost 100 years. Income inequality is at its highest since 1928, the year before the Great Depression began. The U.S. media of $44,911 is only 15 percent of the $301,140 mean (greatly skewed by the richest 10 percent). That ratio is less than any other of the 27 developed countries in the Databook and far less than the average OECD ratio of 35 percent.

People in the United States do have a growing awareness of the increase in the income gap; 65 percent of them think that this gap has increased in the past 10 years. In the United States, 70 percent of the people want the government to reduce the gap; 43 percent of them say that the government should play a large role in doing this. Another 82 percent say that the government should do “a lot” or “some” to reduce poverty. The minimum wage should be raised to $10.10, according to 73 percent of respondents, and another 63 percent want the emergency unemployment insurance extended for another year. Even 54 percent of the people would raise taxes on the wealthy and corporations.

One effect of extreme income inequality is illness. During the past 30 years life expectancy of workers retiring at 65 increased by six years in the top half of income distribution but only 1.3 years in the bottom half. Because poorer communities have fewer health care providers and lack education about health care, people living there are much more likely to have chronic medical conditions such as high blood pressure and diabetes.

Lack of safety is another issue with rising economic inequality. Homicide rates increased at the same rate as the income gap according to studies in 1999 and 2002. The National Bureau of Economic Research reported that “a twenty percent drop in wages leads to a 12 to 18 percent increase in youth crime.”

With higher inequality comes lower levels of representative democracy—and a higher probability of revolution. Poorer citizens believe—sometimes accurately—that government serves only the rich. According to the Huffington Post’s Paul Blumenthal, “The top 0.01 percent of campaign donors—one percent of the one percent–contributed more than 40 percent of all the money spent in the 2012 elections.” In 1980 the political contributions from the top 0.01 percent was under 15 percent. The 17 groups funded by the Koch brothers raised at least $407 million for the 2012 campaign, more than both major parties spend during the 2000 election. The influence from special interest groups causes greater income inequality.

On one winter day in 2012, over 633,000 people were homeless in the United States. Providing shelter at $558 per month, these people could have shelter for a little over $4 billion. Last year, the stock market grew by $4.7 trillion. A wealth tax of just one-tenth of 1 percent (one dollar per thousand) would provide this $4 billion. And the wealthiest people keep getting wealthier.

A huge problem with income inequality is the resulting difficulty to achieve long-term economic growth. The International Monetary Fund concluded that societies like the United States suffering from a huge gap between the wealthy and everyone else “are more vulnerable to both financial crises and political instability.” If hit by external shocks, these societies “often stumble into gridlock rather than agree to tough policies needed to keep growth alive.” It’s a circular situation: gridlock causes greater economic problems, and more economic problems causes more gridlock.

The indictment of former Virginia governor Bob McDonnell and his wife symbolizes the cause of income inequality. Politicians sell out the people who elect them for personal wealth as millionaires and billionaires buy deals, policies, and laws. Tax breaks, bailing out Wall Street, refusal to regulate industrial chemicals that poison drinking water—all these are bought by the wealthy to benefit themselves and impoverish the rest of the population.

After World War II, legislation increased economic opportunity and decreased income inequality through high income and inheritance tax rates for the wealthy, support for labor unions to bargain for living wages, and a culture that does not support a CEO’s wage for an hour equaling a worker’s salary for an entire year. Three decades later, the success of the nation began to disintegrate, and a half century after the success of the mid-twentieth century, millionaire Mitt Romney pays a lower income tax rate than middle-class people.

The wealthy are the cause of the income gap. The question is whether they will change the country’s culture before the bottom 90 percent declares a revolution.